China to strengthen efforts in boosting demand and enhancing catalytic role of government investment

Editor's note: Zhu Fangfei is director and researcher at the Research Department of the Institute for Public Policy of Zhejiang University. The article reflects the author's opinions and not necessarily the views of CGTN. It has been translated from Chinese and edited for brevity and clarity.

On September 26, the Political Bureau of the Central Committee of the Communist Party of China convened a meeting to analyze the current economic situation and outline the next steps for economic work. This meeting not only signaled a shift in China's macroeconomic policy but also showed the country's confidence in achieving its annual economic and social development goals, rallying the entire society to drive sustained economic recovery and improvement. 

Regarding fiscal policy, the meeting emphasized that the intensity of countercyclical adjustments in fiscal and monetary policies should be strengthened, guaranteeing necessary fiscal expenditures, and make sure that people's basic living needs are met, salaries are paid, and governments function smoothly at the primary level; while ensuring that ultra-long-term special treasury bonds and special local government bonds are well utilized, and government investment well leveraged to drive development. As such, the current fiscal focus remains on fully and properly utilizing ultra-long-term special treasury bonds and special-purpose bonds to play out the catalytic role of government investment.

This also aligns with recent policy signals sent by the Ministry of Finance. On October 12, the ministry introduced efforts to intensify counter-cyclical adjustment of fiscal policy to promote high-quality economic development. Minister of Finance Lan Fo'an announced that a package of targeted incremental fiscal policy measures would be introduced in the near future, including issuing special treasury bonds to support large state-owned commercial banks in replenishing the core tier-1 capital and allowing special-purpose bonds to help stabilize the property market.  

One of the key fiscal priorities is to promptly issue and effectively utilize one trillion yuan ($141 billion) of ultra-long special treasury bonds and 3.9 trillion yuan of newly issued special bonds. The issuance of these two types of bonds has clearly accelerated recently. As of September 25, approximately 3.6 trillion yuan of the new special-purpose bonds for this year had been issued, with 300 billion yuan yet to be issued. The balance of outstanding special bonds stood at around 28.2 trillion yuan, 1.3 trillion yuan below the ceiling of 29.5 trillion yuan. As for the one trillion yuan of ultra-long special treasury bonds, 752 billion yuan had been issued as of September 25, with 248 billion yuan remaining. According to the ministry's plan, the issuance of the one trillion yuan of ultra-long special treasury bonds is expected to be completed by mid-November. From past experience, new special bonds are typically issued before the end of October.

Properly utilizing special bonds will help expand effective investment and better harness government investment's catalytic role. This year has seen vigorous efforts in issuing special bonds, with 3.9 trillion yuan of such bonds planned for 2024, the largest amount in history. However, the issuance has been somewhat sluggish. This is due to several factors. 

First, there are certain yield requirements for underlying projects funded by special bonds, and it is impossible to guarantee returns for many new infrastructure projects, resulting in a shortage of viable projects. Second, some projects require matching funds at the local level, and local governments often struggle to provide such funding due to financial constraints. Third, the project management system is not yet sound, with issues such as overlapping regulatory oversight, project delays in the event of bottlenecks, and allocated funds circulating within the financial sector without entering the real economy. 

In response to these challenges, the ministry proposed a scope expansion for the usage of special bonds, which will facilitate the actual implementation of these bonds and their conversion into physical investment. The ministry also suggested to make good use of special bonds to support the acquisition of land reserves and existing commercial housing stock for government-subsidized housing and reasonably supporting infrastructure construction for forward-looking, strategic emerging industries to speed up the development of new quality productive forces. These measures will further optimize the usage scope and management mechanism of special bonds, effectively play out government investment's catalytic role, stabilize the property market, and expand effective investment.

Issuing ultra-long special treasury bonds to fund major national strategic projects and strengthen security capacity in key areas will inject additional capital into critical sectors of economic development. This is conducive to spurring effective investment across society, boosting domestic demand, and ensuring stable economic operations. In particular, the ministry mentioned that China will issue special treasury bonds to support large state-owned commercial banks in replenishing core tier-1 capital. This move will help alleviate pressure from net interest margins, create more room for credit expansion, enhance the banks' stability, and improve their capacity to lend to the real economy, thereby promoting smooth economic operations. Currently, the overall operations of the six large state-owned commercial banks remain stable, but their net interest margins have been in decline long term, with loan growth outpacing capital replenishment. The narrowing of interest margins and difficulties in generating profits restrict banks' ability to issue credit derivatives, which in turn affects macro-liquidity across society. Raising funds through channels such as issuing special treasury bonds to inject capital into large state-owned commercial banks will help expand credit availability and provide more liquidity support for economic development, thus keeping the economy stable within a reasonable range.

As far as market expectation is concerned, subsequent fiscal policies may focus on the following areas: first, expanding the scope of support for new special bonds and ultra-long special treasury bonds, as well as the areas, scale, and proportion of their use as capital to improve fund efficiency and policy effectiveness; second, exploring the possibility of raising the deficit-to-GDP ratio through the Standing Committee of the National People's Congress and issuing additional treasury bonds; third, further optimizing local debt resolution policies and stepping up efforts to help local governments address hidden debt risks, thereby avoiding liquidity risks and ensuring expenditures to see that people’s basic living needs are met, salaries are paid, and governments function smoothly; and fourth, increasing fiscal subsidies to improve people's livelihood.